Jan. 31, 2012 | On the day of the Florida Republican primary, East Bay Rep. Pete Stark entered the fray with a bill intending to eliminate a tax loophole targeting Medicare payroll taxes and used by presidential candidate Newt Gingrich two years ago.
The bill titled "Narrow Exceptions for Withholding Taxes," or more conveniently named the "NEWT Act," would close an existing tax loophole used by self-employed taxpayers to lower Medicare payroll taxes by listing earnings as profits or dividends instead of wages.
Stark charged Gingrich with using this accounting maneuver to save an estimated $69,000 in Medicare taxes in 2010. He used the opportunity to level opposition against a long-time House rival from across the aisle.
"It seems Gingrich is continuing to do his part--in his own infamous words--to let Medicare 'wither on the vine,'" said Stark. "By taking full advantage of a tax loophole often used by wealthy self-employed lawyers and lobbyists to slash their tax liability, Gingrich is happy to undermine Medicare. This tax dodge throws cold water on his feigned concern for the future of Medicare."
Payroll taxes for Medicare are typically taxed at 2.9 percent of all wage income. When small businesses elect to be taxed as an "S Corporation" they avoid so-called "double taxation." Under subchapter "S" of the tax code income and losses are passed on to shareholders.
Stark's bill, a version of which passed the House in 2009, expands the number of income category subject to Medicare payroll taxes. Some of the most egregious users of the tax loophole are small businesses in the fields of health, law, consulting, brokerage services, investment advice and engineering.
According to Stark, Gingrich's array of businesses classified $2.4 million in profits and dividends in 2010. By using the existing loophole, he was able to save $69,000 in Medicare payroll taxes.
Democrats are not immune from taking advantage of the loophole. Former presidential candidate John Edwards as a trial lawyer saved himself nearly $600,000 in Medicare payroll taxes from 1995 to 1998.